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An
important cat has just left the bag. A software programming expert
formerly employed by Goldman Sachs, said to be the largest and most
profitable financial firm in the world, is criminally accused by the U.
S. Attorney for the Southern District of New York (Manhattan) of
misappropriating and permitting dissemination of software programs
Goldman Sachs developed and used to execute “sophisticated, high-speed
and high-volume trades on various stock and commodities markets.” The
defendant is 39-year-old Sergey Aleynikov, who holds dual citizenship
in Russia and the U. S. What is known and unknown about Aleynikov makes
him interesting. But even more interesting is information revealed
about the software at the center of the case in a brief federal court
hearing held July 4 to set bail for Aleynikov.

Codes May Be Used “Unfairly”

On the one hand, the software “codes” downloaded by Aleynikov from Goldman’s computers to his own, via
a server alleged to be located in Germany, are said by the U. S.
Attorney to be very valuable proprietary property which gives Goldman
important advantages in making “many millions of dollars” in financial
markets. If others gain access to the software, they may take market
share from Goldman, may design methods of forestalling and countering
Goldman’s trading tactics, and may reduce Goldman’s trading profits.
For these reasons, the U. S. Attorney acts to prevent, forestall and
punish the theft, even though such disputes are more often left to
civil lawsuits for sorting out merits of conflicting contentions. At the
same time, the U. S. Attorney asserts that the Goldman software program
poses grave dangers to financial markets around the world because “somebody who knew how to use this program could use it to manipulate markets in unfair ways.” This revelation obviously came from Goldman itself, since the U. S. Attorney has not examined the “codes” directly.

The Goldman Sachs Paradigm

If Goldman
Sachs knows its software “codes” can be used to manipulate trading in
markets for stocks and commodities, then Goldman must know how to
manipulate markets by use of its codes. Goldman has told the U. S.
Attorney the codes have been used to make “many millions” in financial
markets. Were Goldman’s uses of the codes manipulative or
non-manipulative, and on what basis is that distinction made? Goldman
wishes the court (and the public) to believe its “proprietary,” secret
codes are used by the firm only in non-manipulative, beneficent ways.
Since those codes are said to give Goldman significant advantages over
other participants in the markets, enabling Goldman to make “many
millions” for itself, the codes ought to be examined to determine
whether they violate federal securities laws.
The same should be said of trading tactics and devices of every
hedge fund in the markets. The SEC’s hands-off approach to such matters
as “proprietary” trade secrets is far more “preposterous” than
allegations made by the U. S. Attorney against Sergey Aleynikov.

Trust, But Verify

This may be as
close as the financial world ever comes to producing a real-life Perry
Mason trial manuscript, wherein a culprit inadvertently makes blatantly
self-incriminating admissions on the stand. The question now is whether
Goldman’s revelation will be acknowledged for what it is. Will the
existence of manipulative computer software be shoved back into
obscurity or examined thoroughly to assure public interests are
served? The SEC
can be expected to do precisely nothing except to assist Goldman in
concealing its “proprietary” trading tactics, no matter how destructive
those tactics may be to fair market operations. Will the Justice
Department exercise leadership to put its SDNY office on the track of
investigating Goldman Sachs for market manipulation? Or will the
Attorney General of New York, Andrew Cuomo, investigate? As last
resort, what will the Congress do? Party leaderships are pondering
appointments to Congress’ “new Pecora commission,” said to be for
special, deeper investigation into the destructive financial events of
2007-2009. Most likely, as with Pecora, Congress will attack political
enemies and leave supporters alone. Upon last inspection, Goldman’s
domination of Congress was bipartisan, particularly at leadership
levels. ~